TSB Classic Plus bank account pays 5% on credit balances but is it right for you?

Barely a week after the details of the new M&S bank current account were published, TSB has joined the bank switching fray with its new Classic Plus account , available from the end of March, paying a headline 5% interest rate on credit balances.

The 5% rate is restricted to balances up to a maximum of £2,000 and whilst there’s no golden hello type switching incentive (£100 seems to be the going rate these days) the credit interest feature is not a short term introductory offer, so if you keep at least £2,000 in your account at all times you’ll earn £80 per year after 20% tax.

The existing TSB current account with the ‘enhance’ feature will no longer be available to new customers, but currently enables account holders to earn interest on larger balances – the rates may be lower but higher net returns are possible e.g. an average £5,000 balance earns interest at 3% and delivers interest income of £120 per annum net of 20% tax.

I’ve been crunching the numbers to see how this latest credit interest offer stacks up against the competition.

As you’d expect it depends the average balance you keep in your bank account, however my calculations show that the new TSB Classic Plus account ranks 2nd behind Halifax Reward if you keep an average credit balance of £500, it comes out top for balances of £2,000 and is fifth best in the rankings based on an average balance of £5,000.

The monthly funding requirement is comparatively low at just £500, with many accounts looking for at least £750 to £1,000 to be paid in each month.

Unlike the terms and conditions associated with majority of high street bank accounts you’re not forced to switch across your direct debits when you open a TSB Plus account.

You are permitted to have a maximum of two accounts – this combined with the non-requirement of direct debits sets the loophole alarm bells ringing – potentially TSB could see an influx of consumers opening two TSB Classic Plus accounts and earing 5% on a combined £4,000 balance, viewing it as an alternative to poor paying instant access savings accounts.

Perhaps this is part of TSB’s thinking – it realises it will draw in a raft of new custom which then gives it an opportunity to woo these particular account openers with top notch customer service thus encouraging them to put down sticks as long term current account customers – direct debits and all?

The remaining features of the TSB Classic Plus have been inherited from the old Lloyds current account tariff which is expensive when it comes to overdrafts or using your debit card overseas.

Overdraft interest is charged at 19.94% as well as a monthly £6 charge for using an authorised overdraft – plus the buffer is only £10 – leaving little room for error before the charges kick in. By contrast the new M&S account announced last week comes with a far more palatable leeway of £100.

If you use the debit card for purchases overseas, not only will you pay 2.99% non-sterling transaction fee on all purchases and cash advances, you’ll also get stung by the £1 non-sterling fee for each and every card purchase made abroad.

In summary – the credit interest element is quite generous particularly as it not a short term introductory offer and the low monthly funding requirement makes it more widely accessible.

However it’s almost as if the account revamp process is only half complete as it still maintains the uncompetitive baggage from the old Lloyds era meaning that unlike M&S Bank this account is less of an all-rounder and not one I’d plump for if you want a cheap overdraft or low cost debit card transactions when holidaying abroad.